Mutual funds' higher interest rates attracting more investors CDs still popular with conservative investors.

November 27, 1991|By Ross Hetrick | Ross Hetrick,Evening Sun Staff

Discouraged by the continuing drop in the rates on bank certificates of deposit, more savers are starting to put their money into mutual funds that offer higher rates.

But banks have been able to hold on to many of their CD customers with their traditional selling points -- a government guarantee and no fluctuation in principal.

The rates on CDs continue to decline and have hit new lows in recent months. In a Nov. 20 survey of banks by Bank Rate Monitor, a newsletter that tracks bank rates, the average yield on a one-year CD has dropped to 5.14 percent and that on a 2 1/2 -year CD to 5.66 percent. The interest on a six-month CD is down to 4.92 percent, Bank Rate Monitor said.

With CD rates below the level of passbook savings, money that had traditionally gone into CDs is now starting to move into mutual funds, according to two Baltimore investment companies.

Mutual funds have been growing rapidly over the last 10 years, going from a national total of $134.8 billion in 1990 to $1.069 trillion by the end of 1990. This growth has continued in 1991, reaching $1.262 trillion at the end of September.

But some companies have seen a recent spurt in the growth of bond funds, which they attribute to CD depositors moving their money.

The principal in bond funds, which include both government and corporate bonds, does fluctuate with the change in interest rates. But the principal does not change to the degree that equity funds do.

Bond fund sales for T. Rowe Price Associates Inc. have more than doubled this year, going from $770 million in the first 10 months of 1990 to $1.5 billion through October of this year, according to Steven E. Norwitz, vice president of the Baltimore-based mutual funds company.

Sales in stock mutual funds are also up, but only by about 15 percent, rising from $1.3 billion to $1.5 billion for the first 10 months of this year.

To attract CD depositors, Price in October introduced its Adjustable U.S. Government Fund that invests in adjustable rate mortgage securities that are backed by the federal government. Offering little change in principal and a current return of 7.8 percent, the fund has already grown to $27 million, Norwitz said.

To make the fund more attractive, Price recently decided not to charge any operating expense to the fund until after June 30 and then to cap the expense at a rate of 0.4 percent of the assets after that date.

"We want to see it grow as fast as possible so that it will operate efficiently," Norwitz said.

Legg Mason Inc., a Baltimore-based stock brokerage firm, has seen the assets of its bond funds grow from $96 million at the beginning of the year to $316 million now. The company has added two tax-free government bond funds in the last year to supplement its two existing bond funds.

Geraldine D. Leder, a spokeswoman for Legg Mason, said the growth in the funds is a direct result of the lower CD rates. "People are much more open to considering CD alternatives," she said.

However, banks still have a strong hold on their CD customers.

The value of CDs under $100,000 at Maryland National Bank and American Security Bank of Washington, both subsidiaries of MNC Financial, has declined only slightly from $8.078 billion on June 30 to $7.995 billion on Sept. 30.

MNC spokesman Daniel Finney said the bank has not seen a significant decline in the amount of CDs and does not expect one. He said the customers who hold the CD generally do not want to accept the risk associated with bond or stock funds.

These sentiments are echoed by Richard J. Seaman, a principal with Danielson Associates, a bank-consulting firm based in Rockville.

"People in general want a higher rate, but are not willing to change their risk profile," he said. Even bond funds, which are less volatile than stock funds, are still preceived as "sophisticated instruments" by normal savers, he said.

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